The question is whether the National Energy Guarantee proposals by the Energy Security Board and the Federal Govt. will be accepted by the States. It is a question of fact as to whether they will or won’t and a question of opinion about the outcomes that will result if the proposals fall through.

We think there is a very arguable point of view, already supported by some evidence, that electricity prices will rise before they fall if the proposals are accepted.

Why will they rise? Because that is the way the energy market works. New supply is going to be required in NSW as a result of plant closures.

In the market model, what happens is that investors or participants form views about supply, demand and prices and build or reduce supply accordingly.

In the most simple case when prices rise it provides a signal for new investment. So if say Liddell and Eraring in NSW are going to close it will lead to higher prices and then new investment. But it will also lead to a reduction in demand.

For instance electricity intensive businesses, such as for instance a data centre, or a bit coin mine, might see the forthcoming rise in prices and decide to close down their business.

Even if the price later falls as a result of new supply will that lead to the energy intensive business shifting back to Australia? Only with long lags. For an example see the aluminium industry in Australia.

Wouldn’t it be better to have a policy that foresaw that most of the generation fleet needs to be replaced and put in place policies to ensure new supply was forthcoming every year, preventing prices rising in the first place?

There can still be plenty of competition in the provision of that supply but once successful participants have revenue certainty and can finance the supply with a low cost of capital. This shifts some, but not all, risk from the private to the public sector.

We argue that in this particular environment the public sector is as well placed as the private sector to manage the risk. Many will not agree with this statement. But we see that reverse auctions, with Govt support are becoming the norm in many areas.

In addition the way the reliability guarantee is framed if a reliability problem is foreseen its AEMO that is ultimately responsible for procuring the new supply. This is defacto central planning.

The weekly numbers

The ASX has started quoting FY 2022 baseload futures. These will hardly be traded but the quotes show that prices in Victoria are expected to fall and that NSW and QLD electricity prices are expected to rise in FY22. For the first time since Hazelwood closed, in that year, NSW futures are higher than Victoria.

We think that is one piece of evidence that could be used to say that Victoria is doing a better job than NSW at managing its electricity supply and there fore the electricity price.

Figure 1: Prices start to rise in 2022

Another thing to note is that South Australian futures remain above those of other States. South Australia has always had more expensive electricity but its disappointing to note that in a relative sense the South Australian premium is forecast to persist.

Not the wind, not the PV, not the potential pumped hydro, not the new gas station, not the battery seem to have any impact on the cost of base load power in South Australia.

LRET policy aims to reduce incentives for new renewable build

The second thing that’s interesting in the numbers is that out year REC prices have declined sharply in the out years. The ESB’s NEG documents make it clear that all new projects will be able to qualify for RECs.

This is a clear policy initiative designed to push the certificate price towards zero and reduce the incentive to new renewable energy projects.

Figure 2 Could fall further if more new projects announced. Source: Mercari

Also of note is that electricity consumption due to hot weather in NSW was way up on last year for this week but electricity prices were contained. Gas prices continued to soften.

Figure 3: Summary

Oil prices rose to A$93 a barrel. This implys LNG export gas prices on long term contract basis of about A$ 11/ GJ not too far away from the prices on which the projects were justified.

Coal prices are A$120 /t. There is about .4t coal/ MWh so that implies a coal cost at spot for Japan quality export coal of around $48 MWh.

Actual full cost will be way higher than that by the time you factor in ancillary load, and other variable and fixed opex as well as the capital burden.

Australian 10 year bonds are lower than a year ago but USA bonds are up.

Figure 4: Commodity prices. Source: Factset

SHARE PRICES

Wind shares have done well. Brookfield has shown up on the Infigen register and this will raise talk of further investment.

Lithium shares are going through some pain not helped by Orocobre having a poor quarter for quantity. Orocobre certainly doesn’t seem to be able to string two good quarters together in a row.

AGL shares are down 26% on a year ago without anything really happening to profits but ORG shares, on the back of higher oil prices as much as anything else are up 20%. That’s where fund managers, if they are lucky or clever, mostly lucky can make the big $.

Figure 5: Selected utility share prices

Figure 6: Weekly and monthly share price performance

Volumes

Figure 7: electricity volumes

Base Load Futures, $MWH

David Leitch is principal of ITK. He was formerly a Utility Analyst for leading investment banks over the past 30 years. The views expressed are his own. Please note our new section, Energy Markets, which will include analysis from Leitch on the energy markets and broader energy issues. And also note our live generation widget, and the APVI solar contribution.

David Leitch is a regular contributor to Renew Economy. He is principal at ITK, specialising in analysis of electricity, gas and decarbonisation drawn from 33 years experience in stockbroking research & analysis for UBS, JPMorgan and predecessor firms.

David Leitch is a regular contributor to Renew Economy. He is principal at ITK, specialising in analysis of electricity, gas and decarbonisation drawn from 33 years experience in stockbroking research & analysis for UBS, JPMorgan and predecessor firms.

6 Comments

Peter F 1 year ago

It would be interesting to look at year to date figures for generation rather than the rolling year. My very rough calculation (which may well wrong) but based on my interpretation of AER figures suggest that demand is down about 3%+ for the first 100 days.

Often when there are turning points in the physical market, the financial market does not notice them until too late so I suspect futures prices are too high. In SA for example average prices from Dec 2016 to April 2017 were $97, $89, $174, $122, $119. average roughly $120. In the last 5 months that has fallen to $83, $158, $109, $80, $79 roughly $101 average.

Contracted new wind, utility solar and projected rooftop solar across the NEM should be generating more than 45 TWh/yr by 2022. This is 25% of total FF power. If demand trends down as it has been doing even at 1% per year. That will mean that total demand on the NEM is about 185 TWh of which FF will be around 110 TWh down to 60% share from 83% now, a system wide capacity factor for FF plant of 38% If Liverpool Range gets up and is efficient as Silverton, that will replace 80% of Liddell by itself

Not including the Solar Reserve plant, SA will install at least 330 MW of wind 1,200 MW of large scale solar and 600 MW of rooftop solar by 2022. This will generate about 6 TWh or slightly over half of SA’s net demand, so even if One-Steel, Lyon, Solar Reserve and DP energy all cancel their plans, SA will be net zero carbon electricity by 2022. The owners of wind and solar plants might go broke because power prices fall below their cost of servicing their capital but new buyers will buy them at cents in the dollar and keep them operating and making very good money at $25/MWh. Then the question is, Is storage, gas or managed demand cheaper for backup ?

Sally Noel Triggell 1 year ago

Wouldn’t it be nice if we had a government that could run the country and supply it’s people with essential services. Or is that old fashioned.

rodmaxc 1 year ago

The operative word is essential, what you consider essential is not necessarily what someone else considers essential, in fact your wish maybe considered expendable.

Pete 1 year ago

Has the futures market has priced in the Gupta and Lyons projects in SA or is it remaining skeptical as to whether they will eventuate? Does this also highlight the limitation of the marginal pricing structure in the NEM? Has average production price per MWh dropped but with gas still required prices will remain high beyond 2022 (suggested by the flattening of the curve)?

Jonathan Prendergast 1 year ago

Taking a step back, who can sell baseload futures in 2022, which are effectively a guarantee of an electricity price to a customer for all their needs? Wind and solar can’t. There is no coal now. Only gas can (for now). So it is more about the liquidity and competition in the futures market, than expected average wholesale prices. It may pay better for customers to go spot in such a scenario.

BushAxe 1 year ago

You’ve nailed it there the only guarantee for SA 2022 at this stage is CCGT, the market’s got no idea until more solar and more importantly PHES is committed as well as interconnection.